Impact Of Government Subsidies On The Economy

Welcome to the second in our series, the 3 blogs, updating you on the impact of government subsidies. In the second video, we’re going to go step by step through the process of doing an analysis diagram on subsidies to help you get the best marks, great marks in your assignments. Quick reminder, a substance any form of government support offered to produce casing consumers with a focus on producers. In this video, the key point is that a subsidy lowers the cost of supply to the producer, and it normally increases the output sold out to lower market costs for the consumer.

Government Intervention

But as we’ll see, the producer, even if they cut the price, knows they’re going to get the subsidy on top which has full. It helps them. So how do we show the impact of a subsidy on producers using a supply and demand diagram? Well, here’s all the data. P. won This initial free market clearing at Cerebra implies, in the absence of any government intervention, that consumers pay P. one of the output-born soldiers. Q. one.

 Now, crucially, a subsidy means that the government pays part of the cost. So, for example, the government offered a subsidy to cover some of the firm’s wage costs. This will cover the cost of purchasing fertilizer for farmers or construction materials for a building, for example, if the import costs go down. The effect of cancers published of the subsidies to shift the supply curve to the light. Leading on the subsidy by the was the difference between the 2 supply because.

Subsidy Per Unit

 So the subsidy per unit is the vertical distance between the 2 supply curves and the impact of a subsidy is to shift the supply to come out to the light leading to a new equity Libre ties on the quantity. P. to Q. 2 I put in again the subsidy paid it that’s coming court importance to get the top marks on analysis of the subsidy **** the vertical distance between the 2 supply cuts. So the consumer. Will pay a price P 2 okay, consumer pay a price paid to. 

That’s quite important, okay, so they’re not, since the consumer saves money because the producers are willing and able to cut the price, but the producer will get paid too. Plus, the subsidy to the government is going to offer a subsidy per unit equal to the vertical distance to the consumer pays P. 2 the producer will get paid to plus the subsidy per unit. Which if you draw up and go across the coast price P. 3, so the supplier, the producer, the manufacturer receives the price paid to. Plus the subsidy per unit.

 Which equals a 3. She says, but so often now something more Q. 2 I’m not getting, I personally take up before peacefully, all of them pay one. Now about the cost to the government, well, the governor, because he’s paying for the subsidy, the government will pay the subsidy per unit. Multiplied by the quantity bought himself, so the subsidy cost will be equal to P. 3, P. two. Multiplied by output queue to search the orange shaded area. 

What’s the impact of a subsidy?

What’s the impact of a subsidy, then? How is the impact of the subsidy influenced by the elasticity of tomorrow? He’s a The price goes down from P. one to P. 2 and the content up from Q. one to Q. 2. The impact of a subsidy is dependent on Paul’s apology on the topic of the subsidies, but also on the elasticity of Tremont. So I won’t have a fairly inelastic tomorrow. Can you see that the market is not much less responsive to changes in the touch-on for a given subsidy? Let’s go back to a slight same notion, same shifts in supply each time.

The Demand Curve

That was the original demand curve, quite a big change in quantity. But if demand is relatively price inelastic, the same is changing because of the sound of a very small change and expansion tomorrow when the price comes down. So subsidies tend to be less effective regarding increasing quantities. When Diamond is relatively price inelastic. 

Not compelled, not diagram, but costs, the next slide. Hey, you can see demand is much more price sensitive. It’s more price elastic again for the same subsidy. Boscombe down from P. one to P. 2. And it has quite a big effect on the album quantity board, how to lower costs. So if demand is high, but price sensitive, it’s only going to take a relatively small attention, because in this case from P. one to P. 2, for the quantity to increase quite substantially. I think in developing the analysis, you then want to show how much the government spends on the subsidy. Will that be a subsidy per unit?

The vertical distance to the consumer pays P. 2 and the producer gets P. 30, so that’s the total cost to the subsidy? The lead time and students typically find it quite difficult to correctly identify the total amount spent by the government on the subsidies. Please, and make sure you practice the subsidized arms regularly, properly, C -control accurately, and then apply well before taking one of the assignments. Okay, in the third and final little part of a trilogy on subsidies, we were going to spend a few minutes evaluating some costs and benefits of a subsidy is a form of intervention. 

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